The accounting and consulting firm already is in hot water for its role in the collapse of U.S. energy giant Enron, which filed for bankruptcy protection in December.

This follows a scandal surrounding Andersen for allegedly filing false and misleading audits in the mid-1990s for Waste Management, North America's biggest rubbish hauler. Andersen agreed in June to pay $7 million to settle federal charges, the largest-ever civil penalty against a Big Five accounting firm.

Andersen issued a statement in response to the settlement stating it "allows the firm and its partners to close a very difficult chapter and move on."

If only that were the case.

Andersen's auditing role in the HIH disaster is coming to light in the Royal Commission. Of critical importance is its audit for the financial year ending June 2000, in which Andersen found HIH was operating with a $470 million surplus -- a rosy assessment some might argue given the black hole in the company's books that surfaced just nine months later.

When HIH collapsed on March 15, Australian talk radio was awash in a sea of anger and frustration. The pain was felt far and wide. There were, and still are, victims galore, with billions of dollars of shareholder and creditor funds up in smoke, not to mention the effects felt by builders, consumers, policy-holders, and people on workers' compensation and disability pensions.

At the time, Ian Ramsay, professor of corporate law at the University of Melbourne, said, "Just in relation to HIH, what's happened there has really stunned many, many people because it looks as though pretty much all the checks and balances failed."

Wayne Martin, legal counsel assisting the Royal Commission, said Monday a report prepared for the Australian Prudential Regulation Authority raised serious questions "as to the general integrity of the audit process by suggesting that the auditors may have knowingly involved themselves in verifying accounts which they knew to be false."

The commission heard that Andersen's auditors knew HIH's accounts were false months before the insurer collapsed.

Martin said as auditors, one of the most important decisions that Andersen had to face was whether HIH was a cause of concern on June 30, 2000. "Had a different conclusion been reached, the apparent solvency of HIH would have been fundamentally questioned," he said.

Deputy Counsel Assisting the Royal Commission, Richard White, alleged large profits were reported from the reinsurance contracts in 1998 and 1999, requiring large losses to be reported in later years. He questioned whether any profits should have been booked with regards to some of the contracts.

The Commission also heard HIH backdated a resolution to subscribe for $100 million in preference shares issued by its subsidiary FAI to "create" an impression of being able to meet its solvency margins.

The accounting firm declined to comment on allegations raised in the report but issued a statement that the firm would respond in April when its witnesses first go before the commission.

Shareholder activist Stephen Mayne is scathing of Andersen's involvement.

"HIH is a clear-cut example of having too many links between the auditing firm and the management of the company," Mayne said. "Three members of the HIH board were partners or former partners of Andersen. It was all too cozy."

Mayne is particularly critical of one former Andersen partner and HIH director who sat on the audit committee and signed off on the accounts in October 2000. He also was on the finance and audit subcommittee of the board of Austar, a regional pay-TV company that, like HIH, has hit the skids.

Austar was floated at $5 a share in June 1999. The company then raised a further $160 million in a placement to institutions at about $8.50 a share. The stock currently is wallowing at around 30 cents and minority shareholders are annoyed.

Andersen also audits the Austar books.

The implications of the HIH scandal are no different from those involving Enron. The general public and the shareholders may wonder whether the books of a company reflect reality.

"We need to look at the role and independence of the auditors and especially the quality of auditing, and the level of comfort shareholders can get from an audit report," said Ted Rofe, chairman of the Australian Shareholders Association.

"What we have seen is audits done by leading accounting firms, and in each case they're not reliable. The Royal Commission still has to present its findings, but there are certainly a number of events that point to the audit teams not doing their job. After all, they are supposed to keep management honest."

As for Andersen, the HIH episode could be very costly. "I think the damages bill against them may run to the tens of millions of dollars," said Mayne.

-- By Stephen Sheldon, UPI Business Correspondent